The economic calendar is quiet in European hours, shifting the spotlight to the US where Federal Reserve Chairman Ben Bernanke is due to testify before the Senate Banking Committee. Traders will size up the central bank chief’s remarks against the relatively hawkish tone found in minutes from January’s FOMC meeting.

While Bernanke is likely invoke familiar rhetoric citing the fragility of the US recovery again, his thoughts on the rise in inflation expectations and the Fed’s apparently evolving view on the cost/benefit balance of additional QE will be most interesting. Cues hinting the central bank will reduce stimulus despite sluggish growth if the price growth outlook continues to swell may weigh on risk appetite.

Such an outcome is likely to push the Yen higher anew as carry trades funded in the low-yielding currency are unwound, while the US Dollar gains amid receding dilution expectations. The net implications of this scenario on USDJPY specifically seem somewhat convoluted, but given the pair’s recently pronounced correlation with the S&P 500 a downside bias appears reasonable.

The Japanese Yen corrected lower in overnight trade as markets digested the currency’s sharp recovery over the preceding 24 hours. The unit rose 2.9 percent on average against its leading counterparts, marking the largest daily increase in nearly three years, seemingly on the back of accelerating risk aversion.

The New Zealand Dollar likewise came under pressure after the an RBNZ survey showed 2-year inflation expectations fell to 2.2 percent in the second quarter, marking the lowest reading in over a decade. The report weighed against rate cut expectations, hinting the central bank will remain in accommodative mode for some time to come.